NBFCs at higher risk of defaults on LAPs: Moodys

The ratings agency estimates that LAP as a segment has grown at a compounded rate of 25% per annum, much higher than the 17% growth in retail credit aided by loose underwriting standards.Joel Rebello | ET Bureau | Updated: December 17, 2016, 14:30 IST

MUMBAI: India’s non-banking finance companies (NBFCs) are at a higher risk of defaults from loans against property (LAP) post the withdrawal of high currency notes but low loan to property ratios will ensure that the losses are limited, credit ratings agency Moody’s said in a note on Friday.

The ratings agency estimates that LAP as a segment has grown at a compounded rate of 25% per annum, much higher than the 17% growth in retail credit aided by loose underwriting standards. These loose standards will come back to bite the industry in the next few months, Moody’s said.

These risks are higher with respect to NBFCs. “We see some non-bank lenders as being at greater risk than traditional banks, due to their higher exposure to non-traditional segments of the market. In particular, these institutions have less diversified loan books than traditional banks, and have a clientele that is more exposed to cash flow disruptions as a result of India's demonetization in early November 2016,” Moody’s said.

The government announced the withdrawal of Rs 500 and Rs 1000 notes on November 8 which constituted 86% of the currency in circulation. Until December 10 people have deposited Rs 12.44 lakh crore worth of notes in banks while the Reserve Bank of India (RBI) had added only Rs 4.61 lakh crore worth of notes back into circulation. The resultant shortage of cash has disrupted businesses leading to delays in repayment.

To be sure, risks in the LAP segment have been increasing because of the depreciating value of collateral which is many cases is residential or commercial properties of small businessmen.

Moody’s said that the 90+ days past due rate of LAP loans reached 2.7% as of March 2016 compared to 2.3% as of March 2015.

Moody’s said this segment has also attracted new market entrants in recent years, because of its high yields and meaningful loan ticket sizes. Which means that competition has also intensified leading to stress. Around 10-11 players now having loan book sizes of at least $1 billion, compared to 2-3 players four years ago.

“The looser underwriting standards adopted by some of these lenders in pursuit of aggressive growth is starting to translate into deteriorating asset quality, a trend we expect to continue as lenders revert to more conservative underwriting practices,” Moody’s said.

However, the rating agency does not predict a sharp deterioration because the loan to value (LTV) ratio for these loans are comfortable at 60% to 70%. LTV is the amount of money banks or NBFCs are willing to lend against the value of the property taken for collateral. Typically home loans LTVs are higher at 80% or more.

This Website Uses Cookies

We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. We also share information about your use of our site with our social media, advertising and analytics partners who may combine it with other information that you've provided to them or that they've collected from your use of their services. Give your consent to our cookies for: